Equinix scrambling to renegotiate debt

Published 4:00 am, Friday, August 30, 2002

Equinix Inc., which made headlines for building massive fortified bunkers to house Web servers and other Internet equipment, could be the latest dot-com casualty.

The Nasdaq Stock Market recently notified the Mountain View firm, which went public two years ago, that it could be delisted soon because of its ailing stock price. Shares in the 4-year-old firm, down 89 percent this year, slid to 31 cents Thursday -- well below Nasdaq's $1 minimum.

Equinix, which has 272 employees, said it is scrambling to renegotiate deals with lenders to avoid defaulting on $263 million in debt.

"We are substantially leveraged," Equinix warned investors in a filing two weeks ago with the Securities and Exchange Commission. "The company does not currently have sufficient cash reserves or alternate financing available to repay the amount outstanding."

Indeed, some investors are concerned the company could be forced to file for Chapter 11 bankruptcy protection, which would wipe out shareholders.

"The company stock is priced right now like there is going to be a bankruptcy," said Andrew Schroepfer, president of Tier 1 Research, a Minneapolis firm that tracks the data center market. But Schroepfer said he is optimistic that the company can work out deals with creditors to slash its debt and avoid bankruptcy.

"I am in the minority in believing in the company," he said.

Like many of its peers, Equinix has been hit hard by the collapse of the Internet bubble.

The company bet heavily on an explosion in Internet traffic, hiring Bechtel Corp. of San Francisco to build about a half-dozen air-conditioned warehouses for Internet service providers, dot-coms and Web hosting firms to swap data and tap into the Net. Equinix said it wound up spending $450 million.

In addition to borrowing money from lenders, the firm lined up an all-star team of tech investors in 1999, including Netscape Communications co-founder Marc Andreessen, venture capitalist Benchmark Capital and Cisco Systems in San Jose. (Andreessen said he has since sold his shares.)

Altogether, Equinix raised more than $400 million in venture capital and raised another $240 million in its public stock offering two years ago.

The company won publicity everywhere from CBS to the Washington Post by likening its facilities to Fort Knox -- complete with armed guards, bulletproof walls, hand scanners and a "man trap" to catch intruders. (Some of the measures turned out to be exaggerated. Despite the firm's contention that its San Jose area facility was in a top-secret location, a Chronicle reporter found the address on the Internet.)

After the Internet bubble burst, many of Equinix's key customers and partners cut back on spending or shut down, making it harder for Equinix to break into the black. Several partners, including ExciteAtHome and WorldCom, wound up in bankruptcy.

Several other data center operators -- including competitors Exodus Communications, Metromedia Fiber Network and PSINet -- have all been forced into Chapter 11.

Equinix acknowledges it must find a way to lower its debt.

The company says it has until Nov. 8 to try to persuade bondholders owed $105 million to exchange their bonds for discounted stock in the company.

In addition, Equinix said it has violated the terms of a $1.9 million bank loan from Wells Fargo by not maintaining enough cash on hand. Equinix said Wells rejected an initial settlement offer, but is still negotiating with the bank. Wells declined to comment.

Equinix Chief Marketing Officer Marjorie Backaus said the company considered filing for bankruptcy (she didn't say when), but decided instead to work with lenders to exchange their loans for stock in the company.

"We are confident we will have a deal," Backaus said.

Since October, the company has reduced its debt by $98 million.

But even if it is able to avoid bankruptcy, the company is diluting the value of existing stock by issuing new shares to lenders.

Schroepfer said Equinix would need to raise another $50 million or so through a private offering to operate until it starts to generate cash on its own.

But Backaus said the company will generate positive cash flow later this year and won't need additional funding.

Several of Equinix's largest investors recently liquidated their holdings, according to documents filed in June. Times Square Capital Management dumped 1.2 million shares. Munder Capital Management sold 1.8 million shares. and Ashford Capital Management, the fourth-largest shareholder,

dumped 80 percent of its 3.9 million shares.

Munder Capital analyst Jeff Osborne said the company sold its shares in April and May because it was concerned both about Equinix's heavy debt and the deterioration in the telecommunications sector as a whole.

"Their customer lineup -- carriers and dot-coms -- have been hit hard," Osborne said. "I'm not sure what the eventual outcome will be."

Times Square Capital and Ashford Capital Management could not be reached for comment.

Andreessen, an early shareholder, said he dumped all his Equinix shares a year and a half ago, but said it had nothing to do with lack of faith in the firm. Rather, Andreessen said he decided to sell every public stock he owned, except for Loudcloud, which he co-founded, after the stock market started slipping. He kept the money in cash and bonds.

"I started to get nervous," Andreessen said, noting that he already had substantial venture capital investments and was on the boards of two tech firms. "I just realized that I had a lot of exposure in my personal portfolio."

Noting that Equinix rival Exodus went bankrupt nearly a year ago, Andreessen insists that Equinix is the "best managed" firm in its niche.

But Equinix's troubles have already had an impact. After initially announcing a $1.2 billion, 4-year contract with Bechtel, Equinix said it wound up ordering fewer data centers and spent only about a third of that amount. Privately held Bechtel, whose revenue dropped 6 percent to $13.4 billion last year, said such disappointments are just part of the business.

"In any given year, some of the work we may have counted on falls through," Bechtel spokesman Jeff Berger said.

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